Today's Edition
A. SREENIVASA REDDY (ABU DHABI)
Global oil prices remain elevated following renewed tensions surrounding the Strait of Hormuz. Brent crude traded at $88.10 per barrel when markets closed on Friday, indicating a steep rise from around $76 per barrel in May and early June, when tensions had subsided.
Analysis by Rystad Energy and Kamco Invest suggests crude prices are likely to remain elevated in the near term.
Rystad Energy said the probability of the US and Iran failing to reach a substantive agreement has risen to 55%, comprising a 35% probability of a stalemate and a 20% chance of renewed, sustained fighting. A narrow agreement remains its base case, with a probability of 40%, while a full resolution has been assigned only a 5% likelihood.
Each outcome would produce a different geopolitical risk premium in Brent prices.
A full resolution would largely remove the acute risk premium, leaving about $0 to $2 per barrel. A narrow agreement would retain a premium of $5 to $10, while a stalemate would sustain a premium of $10 to $15. Renewed fighting would carry the highest premium of $15 to $20 per barrel.
Under the narrow-deal scenario, attacks would decline and an interim agreement would be reached around August 16, allowing the US blockade to be gradually relaxed. Rystad expects traffic through the strait to reach about 10 million barrels per day by mid-August and 14 million barrels per day by October.
Under a stalemate, negotiations would continue without resolving disagreements over nuclear restrictions, sanctions and control of commercial passage. Shipping companies and governments would gradually adapt to the risks, allowing traffic to rise from about 2.5 million barrels per day in August to around 8 million barrels per day by November.
If fighting resumes, negotiations would collapse and restrictions on commercial passage would intensify. Strait traffic would remain near 2 million barrels per day before August 16, while Iranian exports would be limited to about 300,000 barrels per day.
“The narrow deal is still our base case, but it has become a considerably less comfortable one,” said Jorge León, senior vice-president and head of geopolitical analysis at Rystad Energy.
“Both sides have strong economic incentives to avoid a complete breakdown, and that is what keeps the narrow deal alive at 40%. Washington wants oil prices down and a diplomatic result ahead of the November midterms. Tehran has a substantial economic package on the table, including access to frozen assets and export waivers, that it does not want to walk away from permanently,” León said.
The expiry of the 60-day memorandum of understanding negotiation window on August 16 would be the critical point for determining whether a political arrangement could hold or the shipping industry would have to adapt to continuing threats, he said.
The latest tensions follow a significant, but incomplete, recovery in global supplies during June. Kamco Invest, citing International Energy Agency data, said world oil supply increased by 4.8 million barrels per day to 98.8 million barrels per day in June, reversing a decline of 600,000 barrels per day in May. However, output remained about 9.4 million barrels per day below pre-war levels.
OPEC production increased by more than 2 million barrels per day during June as several Middle Eastern producers restored output. Kuwait’s production reached close to its pre-crisis level of 1.9 million barrels per day by the end of the month, although its monthly average was 1.4 million barrels per day. UAE output reached about 3.8 million barrels per day, its highest level in six years.
Supply also increased in early July, with US production reaching a record 13.9 million barrels per day. US crude inventories rose for the first time in 10 weeks to 411.3 million barrels in the week ended July 3. Nevertheless, Kamco said global supply was expected to decline by 3.7 million barrels per day in 2026 to average 102.6 million barrels per day. Supply could rebound by 7.5 million barrels per day in 2027, provided transit volumes through the region increase.
A Bloomberg compilation of Brent crude forecasts points to prices gradually easing over the coming quarters. The mean forecast among the agencies surveyed stands at $82.40 per barrel for the third quarter of 2026, declining to $77.80 in the fourth quarter, $75.80 in the first quarter of 2027 and $74.40 in the second quarter. The median forecast is $80 for the third quarter and $75 per barrel for each of the following three quarters.
Lale Akoner, Global Market Strategist at eToro, said investors were pricing in increased geopolitical risk but were not yet treating the situation as a major supply crisis.
“If oil prices remain elevated, higher fuel and transport costs could feed into broader inflation, making it harder for central banks to justify cutting interest rates,” she said.
Such conditions could create headwinds for bonds and interest-rate-sensitive sectors, including real estate, utilities and highly valued growth stocks, while energy companies could benefit if supply concerns persist.
Unless oil production or exports experience a more significant disruption, Akoner said the wider market impact was likely to remain concentrated on oil prices, inflation expectations and assets that are particularly sensitive to interest-rate movements.
